For the fourth quarter of 2005, revenues were $205.7 million, representing an increase of 55 percent compared to revenues of $132.6 million for the third quarter of 2005, and an increase of 80 percent compared to revenues of $114.1 million for the fourth quarter of 2004. Gross margins for the fourth quarter of 2005 were 21.3 percent, a decrease compared to 24.8 percent in the third quarter of 2005 and 21.7 percent in the fourth quarter of 2004.

The Company also reported net income for the fourth quarter of 2005 of $25.0 million, or $0.59 per share. Net income for the fourth quarter includes a one time write-off of in-process research and development related to the acquisition of Microelectronica Espanola of $2.5 million and one time gains on sales of investments of $6.3 million, which combined represent a net increase in net income of $3.8 million or $0.090 per share. These results compare with net income of $13.9 million, or $0.34 per share, in the third quarter of 2005, and net income of $9.0 million, or $0.24 per share, in the fourth quarter of 2004.

For the year ended December 31, 2005, revenues increased by 55 percent to $539.9 million, compared to revenues of $347.6 million for the year ended December 31, 2004. Gross margins for the year were 23.4 percent, compared with 23.8 percent in 2004. The Company also reported net income of $52.6 million, or $1.30 per share for 2005. Net income for 2005 includes the one time items as detailed above, which combined represent a net increase in net income for the year of $3.8 million or $0.093 per share. These results compare with net income of $24.2 million, or $0.66 per share in 2004.

Commenting on the results, Dov Moran, President and Chief Executive Officer of M-Systems said, "We are very pleased with our results for the fourth quarter and the full year, which saw top and bottom line performance well ahead of our initial expectations, with annual revenues exceeding $500 million. Our growth was driven by strong demand for our products, particularly in our primary end markets, mobile devices and USB flash drives."

He continued, "In addition to our strong performance, the fourth quarter was highlighted by important strategic initiatives, which we believe position M-Systems well for future growth. The acquisition of Microelectronica Espanola enhances our ability to capitalize on the tremendous opportunities that exist in the SIM card market. In addition, we introduced DOC H3, our next generation DiskOnChip product, the first multi-sourced, plug-and-play EFD (embedded flash drive) solution in the industry, providing mobile handset and other consumer electronic device manufacturers unparalleled versatility in the design of their products. We believe DOC H3 will further strengthen DiskOnChip's position as the leading EFD on the market. We also announced two new strategic agreements - an agreement with Renesas, the Company's fourth flash supplier, which will further support the growth of our DiskOnKey activity as well as other product lines; and a joint development agreement with Spansion for the mobile market."

Mr. Moran concluded, "M-Systems' revenues have grown over 12 fold in the past four years, with net profits growing even faster. We expect 2006 will be yet another exciting and challenging year in which we continue to work hard to further grow M-Systems. We are confident that we are targeting the right markets and we have the right technologies, product offering, strategy and team to achieve our long-term objectives."